Fitch warns of the elections: 'Political instability will make reducing the deficit difficult'

The credit rating agency Fitch is keeping Israel's credit rating unchanged, but in a new report it published, it warns of the months following the elections, which could plunge the country into a prolonged period of political instability. According to the company, neither of the two blocs currently has a clear majority in the polls, and Israel could be left with a transition government for months, and perhaps even head to additional elections. Meanwhile, public debt continues to grow, defense expenditures weigh on the budget, and political instability could make it difficult for the government to make decisions that would reduce the deficit.In the report, which was published two days ago and deals with the credit ratings of Middle Eastern and North African countries, Fitch devotes an entire chapter to Israel. Its credit rating remains at the sixth-highest level on the company's rating scale, with a negative outlook, which means the possibility of a rating downgrade in the future. This is not a new rating decision, but a review in which Fitch explains its concerns regarding Israel's economic, security, and political situation.One of the prominent warnings concerns the Knesset elections, which will take place on October 27. Fitch notes that the race is particularly tight, and that there is no clear sign in the polls that one of the two blocs will manage to achieve 61 seats and form a government. According to the company's assessment, the current government may continue to serve as a transition government for several months, until a new government is formed or additional elections are announced. Fitch notes that Israel has a history of unstable governments that struggled to make decisions, and warns that the political situation could make it difficult to reduce the deficit and curb the rise in debt.The economic data presented by the company is also concerning. Fitch forecasts that the government deficit will reach 7.5% of GDP this year, compared to 6.5% in 2025 and 9% in 2024. The main reason is high defense expenses, which continue to weigh on the budget. Next year, the company estimates that the deficit will drop to 6.6%, and in 2028 it will narrow to 5.1%, mainly thanks to the expected drop in military expenditures.However, Fitch qualifies this forecast. The report states that state revenue collection since the beginning of the year has been high, and therefore it is possible that the deficit will be lower than the forecast of 7.5%. This reservation is particularly important against the backdrop of Finance Ministry figures published last week, according to which the deficit in the 12 months ending in September stood at 3.2% of GDP. Nevertheless, there is a difference between the data. Fitch calculates the deficit for the entire government for the full year 2026, and also includes expenses and revenues that have not yet been actually paid, while the Finance Ministry publishes the state budget deficit according to money that actually entered and exited. Therefore, the two numbers cannot be directly compared.Another concern of the rating agency is the continued rise in public debt. According to its forecast, government debt, which stood at 68.5% of GDP in 2025, will rise to 70.3% this year, to 71.7% in 2027, and to 72.1% in 2028. For comparison, in countries with a similar credit rating, half of the countries are expected to have debt lower than 58% of GDP in 2028. Fitch warns that if defense expenses are higher than expected, Israel's debt could grow even further.Israel's economic strengths could help offset credit risksAlongside the warnings, Fitch also highlights the strengths of the Israeli economy. Israel's economy is diversified, has proven capable of coping with crises, and contains sectors that produce high-value goods and services. According to the forecast, the economy will grow by 3.2% this year, compared to 3.5% in 2025. Next year, growth of 3.5% is expected, and in 2028 it will fall to 3%. Fitch also estimates that Israel will continue to bring in more money from abroad than it spends, with a current account surplus of 2.1% of GDP this year, 2.3% next year, and 2.5% in 2028. In addition, Israel's assets abroad continue to be higher than its debts to foreign countries, a figure that strengthens its economic position.Fitch also identifies a positive change in the security situation. Israel is still dealing with threats from Iran, Lebanon, and Syria, but the weakening of Iranian-backed organizations across the Middle East has strengthened its position and reduced some of the risks to its credit rating. Nevertheless, a renewed escalation that harms the economy and the state budget over time could lead to a rating downgrade, as could a continued rise in debt or weaker-than-expected growth.On the other hand, if Israel succeeds in stopping the rise in debt by reducing the deficit, or if security conflicts cool down, Fitch may change the rating outlook from negative to stable. A sustained reduction in political risks and an improvement in government functioning could also help achieve this. Israel's next rating review is expected to take place by the end of March 2027, several months after the elections, when it will already be clearer whether a government capable of making economic decisions has been formed, or whether Israel is once again on the way to the polls.